Headquartered in Burlington, North Carolina,
Laboratory Corporation of America Holdings
(
LH
) is the second largest independent clinical laboratory company in
the US.
The company is aiming at increasing its revenues derived from
esoteric testing in the next few years. Riding on the acquisitions
of Monogram Bioscience (August 2009) and Genzyme Genetics (December
2010), LabCorp derives approximately 40% of revenues from genomic,
esoteric and anatomic pathology categories, which can climb to 45%
in the next 3-5 years. This specialized niche is now a much sought
after avenue for top-line growth and its arch rival
Quest Diagnostics
(
DGX
) is also engaged in strategic acquisitions to bolster its esoteric
testing portfolio.
LabCorp has nonetheless strengthened its foothold in the
diagnostics space through both organic and inorganic means and
plans to collaborate with leading companies and academic
institutions to provide a wider portfolio of tests. Some of the
significant acquisitions include Orchid Cellmark, DCL in Indiana,
and Westcliff Medical Laboratories (ongoing integration is expected
to be completed in the first quarter of 2012) in California where
LabCorp has a limited presence.
With regard to business collaborations with Managed Care
Organizations ("MCOs"), LabCorp is doing a good job. The company
has renewed some significant MCO contracts and is working to
improve services. Besides a few stray cases, the company found
the managed care environment to be relatively stable with respect
to pricing and does not expect downward pricing pressure in
contract renewals.
Besides, LabCorp is quite well capitalized on the liquidity
front and entered into a new $1 billion credit facility in December
2011 (consisting of a five-year revolving facility in the principal
amount of $1.0 billion). The company has been using its cash
balance to make strategic acquisitions as well as reward its
shareholders through share repurchases. LabCorp also believes that
free cash flow should record a healthy increase in 2012-2013 as
Genzyme Genetics starts contributing to the bottom line.
However, economic uncertainty is affecting LabCorp's volume,
which is visible in the continuous decline in organic growth over
the past few quarters (3% in first, 2% in second and 1.2% in the
third quarter of fiscal 2011). With no significant job growth in
the economy or an increase in commercially insured covered lives,
the company's overall volume growth will continue to languish until
the economy rebounds.
Considering the pros and cons, we reaffirm our Neutral
recommendation on LabCorp. The stock retains a Zacks #3 Rank (Hold)
in the short term.
QUEST DIAGNOSTC (
DGX
): Free Stock Analysis Report
LABORATORY CP (
LH
): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research